How are New Banks Different?

In a country like India or the United States, we see that every few years there are new banks coming up.

These new banks try to carve out their niche by targeting the base of teenagers, early stage corporate employees, self-employed individuals, and pensioners as potential customers.

Having said that, at many times, they find themselves at loggerheads with existing well capitalised players who have built a name for themselves.

Taking this into account, how exactly do new banks grow and compete in a regulated and competitive market?

Let us look at some of the reasons that set the new bank apart:

Brand Building and Customer Acquisition:

New banks aim to attract customers quickly by offering innovative services, no frills accounts, waiver on service charges, etc.

Lower Cost of Operations:

Operating with minimal physical infrastructure, these banks save on expenses and redirect these savings towards other value creating activities.

Aggressive Strategy for Market Penetration:

To compete with established banks, new entrants incentivize customers through higher interest rates.

Technology-Driven Efficiency:

Utilizing modern technology allows for seamless banking services at lower costs, improving customer satisfaction.

Focus on Personalized Services:

Tailored services like easy account access, intuitive apps, and faster responses help them stand out.

So, here we see that new banks are going out of the way to garner new customers and do brand building.

Considering this, how should risk averse investors approach it.

This is on the back of Banks in India (like YES Bank and Laxmi Vilas Bank) and Banks in the USA(like Silicon Valley Bank) collapsing.

Key Considerations

Safety of Capital: Ensure the bank is regulated by reputable authorities (e.g., RBI in India) and deposits are insured.

Balance Risk and Returns: Diversify deposits across new and established banks to mitigate risks.

Reputation and Financial Health: Review the bank’s credit rating and financial stability before committing funds.

Inflation-Beating Returns: Evaluate whether the higher rates adequately preserve capital while earning above inflation.

Lower costs, better service and higher interest rates is something every customer strives for while operating a bank account.

Taking this into account, choose the ‘new bank’ cautiously by focusing on their long-term reliability.